Monday, June 23, 2014

Fiduciary Rulemaking: Does the SEC Chair Have the Courage to Defeat Wall Street's Undue Influence?

Defeating the American Oligarchy: Wall Street, FINRA and the Challenge for SEC Chair Mary Jo White

For long it has been known that a series of meetings by
representatives of the largest brokerage firms in the United States has been
held over the past several years. In these meetings strategy sessions occur on how to best defeat the reforms of the financial services
industry contained in the Dodd Frank Act of 2010, by influencing the many regulations being drafted.

Specific meetings have
been held by Wall Street firm representatives (and lobbyists) on how to defeat the fiduciary standard of conduct, authorized (but not mandated) to be applied by the SEC under
Section 913 of the Dodd Frank Act, from being applied to “personalized investment
advice” when provided by stockbrokers (i.e., registered representatives of broker-dealer firms). In such meetings the brokerage firms' representatives have stated that they will do “whatever it takes” – in terms of lobbying
efforts (including campaign contributions) to defeat both the SEC’s and the
DOL’s initiatives to apply the fiduciary standard of conduct.

Why is Wall Street so opposed to the fiduciary standard, requiring firms and their "financial consultants" to act in the best interests of American consumers? Because at its core the fiduciary standard is a restraint on conduct. It results in disintermediation. If more and more Americans become represented by trusted "purchaser's representatives" (i.e., fiduciaries), no longer would Wall Street firms, through a host of fees (including often-unknown-to-the-consumer back-office revenue sharing payments) extract excessive rents from the American consumer of investment products. More of the returns of the capital markets would flow to individual Americans, and less to financial services firms. Wall Street firms would, in essence, lose tens or even hundreds of billions of dollars of revenue each year (while individual Americans would gain).

To defeat the expanded application of the fiduciary standard by the SEC, over the past few years Wall Street has flooded Washington,
DC with newly-hired lobbyists (both internal and external). By one estimate,
the number of visits by Wall Street’s various anti-fiduciary lobbyists to the
halls of Congress, the SEC and the DOL outnumber the visits by pro-fiduciary
groups by at least 20 to 1.

Campaign contributions to members of Congress serving on the
House Financial Services Committee or the Senate Banking Committee have also surged;
many of those members of Congress receiving large campaign contributions from Wall Street and the insurance industry have signed onto letters urging the
DOL and SEC to delay fiduciary rulemaking.

Of course, it’s not just visits by Wall Street and its
lobbyists that seek to influence, nor is it also just campaign contributions. A far more subtle
way of wielding influence is to serve as the “next employer” for many who work
at the SEC. For example, FINRA (the broker-dealer “self-regulatory organization, which is owned by broker-dealer firms, and which over its entire history has failed to incorporate fiduciary standards into its regulatory codes in favor of the much lower, and Wall Street-friendly, meaningless suitability standard) often offers ex-SEC staffers high-paying positions. According to a June 2014 InvestmentNews article, FINRA’s
average employee compensation is twice that of the securities industry it
regulates.

Law firms representing Wall Street firms, and the broker-dealer
firms themselves, also provide high-paying jobs to many ex-SEC staffers. As the
Project on Government Oversight reports, “Former employees of the Securities
and Exchange Commission (SEC) routinely help corporations try to influence SEC
rulemaking ….” Even the SEC’s Inspector General issued reports raising troubling
questions about whether the promise of future employment representing Wall
Street causes some SEC officials to treat potential employers and their clients
with a lighter touch.

The “reverse revolving door” also operates. FINRA, Wall Street and the many law firms that represent brokerage firms also
become the source of senior SEC staff personnel. And Wall Street firms
encourage their executives to take government jobs, even though the pay is
usually far less for working at government agencies. As summarized in an
article appearing on March 22, 2013 in The
Huffington Post: “On the heels of disclosures that major financial
institutions maintain policies to pay special bonuses to executives who leave
for high-level government positions, a prominent consumer advocacy group has
threatened to file lawsuits to challenge such practices. Public Citizen, the
organization founded by consumer advocate Ralph Nader, told The Huffington Post that it was so
incensed by news of these bonus policies -- as detailed in a report from
watchdog group Project on Government Oversight -- that it is now readying a
legal challenge.”

Recently Martin Gilens, the co-author of a recent academic
study by researchers at Northwestern and Princeton, “Testing Theories of
American Politics: Elites, Interest Groups and Average Citizens,” summarized
the research by describing the United States as an oligarchy (rather than a
democracy, or a republic) and further stating: “[C]ontrary to what decades of
political science research might lead you to believe, ordinary citizens have virtually
no influence over what their government does in the United States. And economic
elites and interest groups, especially those representing business, have a
substantial degree of influence. Government policy-making over the last few
decades reflects the preferences of those groups -- of economic elites and of
organized interests.”

Will new SEC Chair Mary Jo White, a former federal
prosecutor with a keen knowledge of issues involving public corruption, have
the courage to stand up to Wall Street and adopt a bona fide fiduciary standard?
(I define this to be the “best interests fiduciary standard” applicable under
the Advisers Act and state common law to investment and financial advisors, in
which the fiduciary duty of loyalty is not satisfied by mere disclaimers or
disclosures, but instead where the client must be treated substantively fair at
all times when a conflict of interest is not avoided and continues to exist; in
other words, a fiduciary duty of loyalty which respects the fundamental principles
that no trusted advisor can serve two masters, and no client would ever provide
meaningful consent to be harmed.)

More importantly, will SEC Chair Mary Jo White effectively
manage others – including the SEC’s own staffers – in a manner in which outside
undue influence is defeated, in order that fiduciary rulemaking can proceed
with earnest and properly.

Will SEC Chair Mary Jo White possess the personal courage to face up to the oligarchy?

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Ron A. Rhoades, JD, CFP® sailed across the Atlantic on a tall ship, performed in theme parks and road shows in Europe and America as a Disney character, rowed on a championship crew team, marched in the Macy’s Thanksgiving Day Parade, marched in competition with a state-champion rifle drill team, undertook a solo one-week trip into the Everglades, escorted numerous celebrities around Central Florida, performed as a “Tin Man” at a mountaintop theme park called “The Land of Oz” in Beech Mountain, NC, and served as a stage manager and talent scheduling coordinator for entertainment productions at Walt Disney World. And then he graduated college.

Since then, Ron Rhoades earned his Juris Doctor degree, with honors, from the University of Florida College of Law, which was preceded by a B.S.B.A. from Florida Southern College. Ron Rhoades has 30 years of experience as an attorney, with nearly all of those years substantially devoted to estate planning, tax planning, and retirement plan distribution planning. Ron also has over 15 years as a personal financial adviser. He was a principal with an investment advisory firm where he served as its Director of Research and Chair of its Investment Committee.

The author of numerous articles published in financial industry publications and several books, Dr. Rhoades has been quoted in numerous consumer and trade publications, and has been interviewed on Bloomberg's "Masters in Business" radio show segment. He writes occasional articles for industry publications. Ron is a frequent speaker at local FPA chapter meetings and national conferences in the financial planning and investment advisory professions.

Ron Rhoades was the recipient of The Tamar Frankel Fiduciary of the Year Award for 2011, from The Committee for the Fiduciary Standard, as he “altered the course of the fiduciary discussion in Washington.” He was also named as one of the Top 25 Most Influential persons associated with the investment advisory profession in 2011 by Investment Advisor magazine, and was voted to the “Sweet 16 Most Influential” in Wealth Management’s 2013 “March Madness” competition. Dr. Rhoades was also named as one of the "Top 30 Most Influential" members in NAPFA's 30-year history in 2013. This blog was also called one of the "Top 25 Most Dangerous" in financial services.

Ron A. Rhoades, JD, CFP® became Program Director for the Financial Planning Program (B.S. Finance, Financial Planning Track) at Western Kentucky University's Gordon Ford School of Business in July 2015. He provides instruction to highly motivated, exceptional undergraduates students in such courses as Applied Investments, Retirement Planning, Estate Planning, and the Personal Financial Planning Capstone course. He has previously taught courses in Insurance & Risk Management, Employee Benefits, Money & Banking, Advanced Investments, and Business Law I and II.

Ron also serves on the Steering Committee of The Committee for the Fiduciary Standard, on whose behalf he frequently travels to Washington, D.C. to meet with policy makers in Congress and in government agencies regarding the application of the fiduciary standard to personalized investment advice.